The Problems of Process Analysis DEFY Any Mathematical Approach

Both the logical and the mathematical economists assert that human action ultimately aims at the establishment of such a state of equilibrium and would reach it if all further changes in data were to cease. But the logical economist knows much more than that. He shows how the activities of enterprising men, the promoters and speculators, eager to profit from discrepancies in the price structure, tend toward eradicating such discrepancies and thereby also toward blotting out the sources of entrepreneurial profit and loss. He shows how this process would finally result in the establishment of the evenly rotating economy. This is the task of economic theory. The mathematical description of various states of equilibrium is mere play. The problem is the analysis of the market process.

A comparison of both methods of economic analysis makes us understand the meaning of the often raised request to enlarge the scope of economic science by the construction of a dynamic theory instead of the mere occupation with static problems. With regard to logical economics this postulate is devoid of any sense. Logical economics is essentially a theory of processes and changes. It resorts to the imaginary constructions of changelessness merely for the elucidation of the phenomena of change. But it is different with mathematical economics. Its equations and formulas are limited to the description of states of equilibrium and nonacting. It cannot assert anything with regard to the formation of such states and their transformation into other states as long as it remains in the realm of mathematical procedures. As against mathematical economics the request for a dynamic theory is well substantiated. But there is no means for mathematical economics to comply with this request. The problems of process analysis, i.e., the only economic problems that matter, defy any mathematical approach. The introduction of time parameters into the equations is no solution. It does not even indicate the essential shortcomings of the mathematical method. The statements that every change involves time and that change is always in the temporal sequence are merely a way of expressing the fact that as far as there is rigidity and unchangeability there is no time. The main deficiency of mathematical economics is not the fact that it ignores the temporal sequence, but that it ignores the operation of the market process.

—Ludwig von Mises, Human Action: A Treatise on Economics, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007), 2:355-356.

Those Suggesting a Quasi-Market for the Socialist System Have NEVER Wanted to Preserve Stock and Commodity Exchanges, Futures Trading, and Moneylenders as Quasi-Institutions

Nobody has ever suggested that the socialist commonwealth could invite the promoters and speculators to continue their speculations and then deliver their profits to the common chest. Those suggesting a quasi-market for the socialist system have never wanted to preserve the stock and commodity exchanges, the trading in futures, and the bankers and moneylenders as quasi-institutions. One cannot play speculation and investment. The speculators and investors expose their own wealth, their own destiny. This fact makes them responsible to the consumers, the ultimate bosses of the capitalist economy. If one relieves them of this responsibility, one deprives them of their very character. They are no longer businessmen, but just a group of men to whom the director has handed over his main task, the supreme direction of the conduct of affairs. Then they—and not the nominal director—become the true directors and have to face the same problem the nominal director could not solve: the problem of calculation.

—Ludwig von Mises, Human Action: A Treatise on Economics, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007), 3:708-709.

The Capitalist System Is NOT a Managerial System; It Is an Entrepreneurial System

Our problem does not refer to the managerial activities; it concerns the allocation of capital to the various branches of industry. The question is: In which branches should production be increased or restricted, in which branches should the objective of production be altered, what new branches should be inaugurated? With regard to these issues it is vain to cite the honest corporation manager and his well-tried efficiency. Those who confuse entrepreneurship and management close their eyes to the economic problem. In labor disputes the parties are not management and labor, but entrepreneurship (or capital) and the salaried and wage-receiving employees. The capitalist system is not a managerial system; it is an entrepreneurial system. One does not detract from the merits of corporation managers if one establishes the fact that it is not their conduct that determines the allocation of the factors of production to the various lines of industry.

—Ludwig von Mises, Human Action: A Treatise on Economics, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007), 3:708.

On a Particularly Important Flaw in the Orthodox or Textbook Version of the Economic Calculation Debate

 But a particularly important flaw in the orthodox story is, as Hayek tried to make clear during the debate, the curious disjunction between the “theoretical” and the “practical.” It is not simply that Barone and his mentor Pareto scoffed at the workability of the theoretical equations under Socialist planning. More important is the point that Mises and Hayek were implicitly attacking the relevance of the entire concept of Walrasian general equilibrium from which these equations flowed. For Mises and Hayek there was no disjunction between the “theoretical” and the “practical”; following the Austrian tradition, a theory that necessarily violated practical reality was an unsound theory. The fact that in a changeless world of perfect knowledge and general equilibrium a Socialist Planning Board could “solve” equations of prices and production was for Mises a worse than useless demonstration. Clearly, as Hayek would later develop at length, if complete knowledge of economic reality is assumed to be “given” to all, including a Planning Board, there is no problem of calculation or, indeed, any economic problem at all, whatever the economic system. The Mises demonstration of the impossibility of economic calculation under socialism and of the superiority of private markets in the means of production applied only to the real world of uncertainty, continuing change, and scattered knowledge.

—Murray N. Rothbard, “Ludwig von Mises and Economic Calculation Under Socialism,” in The Economics of Ludwig von Mises: Toward a Critical Reappraisal, ed. Laurence S. Moss (Kansas City: Sheed and Ward, 1976), 68.

The Problem of Economic Calculation Is of Economic Dynamics; It Is NO Problem of Economic Statics

Now it is a complete fallacy to suppose that the problem of economic calculation in a socialist community relates solely to matters which fall into the sphere of the daily business routine of managers of joint stock companies. It is clear that such a belief can only arise from exclusive concentration on the idea of a stationary economic system — a conception which no doubt is useful for the solution of many theoretical problems but which has no counterpart in fact and which, if exclusively regarded, can even be positively misleading. It is clear that under stationary conditions the problem of economic calculation does not really arise. When we think of the stationary society, we think of an economy in which all the factors of production are already used in such a way as, under the given conditions, to provide the maximum of the things which are demanded by consumers. That is to say, under stationary conditions there no longer exists a problem for economic calculation to solve. The essential function of economic calculation has by hypothesis already been performed. There is no need for an apparatus of calculation. To use a popular but not altogether satisfactory terminology we can say that the problem of economic calculation is of economic dynamics: it is no problem of economic statics.

—Ludwig von Mises, Socialism: An Economic and Sociological Analysis, trans. J. Kahane (Indianapolis: Liberty Fund, 1981), 120-121.

The Ultimate Aim of Socialism Was the “End of History” When Perfect Social Harmony Is Established

The ultimate aim of socialism, inspired by Marx, was the “end of history,” in which perfect social harmony would be permanently established. Social harmony was to be achieved by the abolition of exploitation, by the transcendence of alienation, and above all, by the transformation of society from the “kingdom of necessity” into the “kingdom of freedom.”

Collective ownership was not an end in itself. By rationalizing material production and thus advancing it beyond the bounds reachable under capitalism, collective ownership was to usher mankind into a post-scarcity world.

The writings of Marx and his followers thus include critiques of capitalism on the grounds that its production is “irrational,” that it tends towards increasing monopolization and the immiseration of a growing proportion of the populace, and that it produces a business cycle that makes it inherently unstable. Marx and other socialists thus sought to demonstrate the productive inferiority of the capitalist system relative to what socialism could achieve.

The socialist project to which Mises responded therefore proceeded in two interrelated stages. First, by rationalizing production, socialism would eliminate the waste inherent in capitalism owing to its “anarchy of production,” eliminate capitalism’s tendency towards greater monopolization, and do away with capitalism’s inevitable crises; all of this would bring about unprecedented increases in material wealth. Second, these productivity gains would usher in a post-scarcity era, which in turn would provide the material preconditions for lasting social harmony.

—Peter J. Boettke and Peter T. Leeson, “Still Impossible after all these Years: Reply to Caplan,” Critical Review: A Journal of Politics and Society 17, nos. 1-2 (2005): 156. 

The Price Mechanism Solves the Allocation Problem WITHOUT Information about Individuals’ Preferences

The start of the debate about the feasibility of socialism was Mises’s early work (1920, 1922). Until then, a socialist commonwealth was described as an idealistic society where the question of how to allocate resources was neither asked nor answered. Socialism, at the time, was defined as a regime where there is no private property of the means of production (even if there was private property of final consumption goods). In a small society, where there is intimate knowledge among individuals (such as a family), there is no need to allocate resources with a price mechanism. Parents usually do not use a price mechanism to allocate the resources of the household. However, the situation of a large society is different, where there are numerous anonymous interactions, some of which may be repeated and many others of which may not. This anonymity means that individuals do not have knowledge of the preference sets of other individuals and also face limited opportunities to learn such preferences. The price mechanism solves the allocation problem without information about individuals’ preferences.

—Peter Lewin and Nicolás Cachanosky, Capital and Finance: Theory and History, Routledge International Studies in Money and Banking (London: Routledge Taylor and Francis, 2020), 112-113. 

Central Banks in Many Countries Have for Decades Published Deliberately Misleading Statistics

Central banks in many countries, the venerable Bank of England not excepted, have for decades published deliberately misleading statistics, as, for example, when part of the gold in their possession is put under “other assets” and only part is shown as “gold.” In democratic Great Britain before World War II, the Government’s “Exchange Equalization Account” suppressed for a considerable period all statistics about its gold holdings, although it became clear later that these exceeded the amount of gold shown to be held by the Bank of England at the time. This list could be greatly lengthened. If respectable governments falsify information for policy purposes, if the Bank of England lies and hides or falsifies data, then how can one expect minor operators in the financial world always to be truthful, especially when they know that the Bank of England and so many other central banks are not? 

—Oskar Morgenstern, On the Accuracy of Economic Observations, 2nd ed. (Princeton, NJ: Princeton University Press, 1973), 20-21. 

Oskar Morgenstern Questions the Accuracy of Economic Data, the Very Basis for Econometrics

A Morgensternian critique of econometrics is different from other critiques that focus on econometrics as practiced by prominent economists. Edward Leamer (1983), in an influential article, stated that econometric analysis is not taken seriously due to the amount of “data mining” and “number crunching.” Econometricians make implicit assumptions about the distribution of errors, the functional form, and the variables in the model. According to Leamer statistical interference is based on opinions and whims. In a similar way, Deirdre McCloskey and Steven Ziliak (2008) criticize the procedure of econometricians and the abuse of significance testing. Too often statistical significance is confused with real world significance. Morgenstern’s critique is, however, on a different level. The critique of econometric practices and techniques does not deal with the accuracy of the underlying data but takes it as given. Morgenstern more fundamentally questions the accuracy of economic data and, consequently, the very basis for econometrics.

It is indeed surprising to note how much the problem of accuracy in economic data has been neglected. This is not the case in the physical sciences (Preston and Dietz 1991). Within the physical sciences the error of observation is always explicitly mentioned, yet in economics there is simply no error estimate. This means that economists do not know the accuracy of the economic data presented to them. This is even more troubling when one considers that in social or economic data there are more possible sources of error than in the physical sciences. Economists, therefore, face the question of why the problem of accuracy of economic data is rarely mentioned or passed over in silence in economics, while in the physical sciences this problem is widely acknowledged.

—Philipp Bagus, “Morgenstern’s Forgotten Contribution: A Stab to the Heart of Modern Economics,” American Journal of Economics and Sociology 70, no. 2 (April 2011): 542. 

Under Democratic Government, the Problems of Capital Preservation and Accumulation Become the MAIN Issue of Political Antagonisms

If such a country is under a democratic government, the problems of capital preservation and accumulation of additional capital become the main issue of political antagonisms. There will be demagogues to contend that more could be dedicated to current consumption than those who happen to be in power or the other parties are disposed to allow. They will always be ready to declare that “in the present emergency” there cannot be any question of piling up capital for later days and that, on the contrary, consumption of a part of the capital already available is fully justified. The various parties will outbid one another in promising the voters more government spending and at the same time a reduction of all taxes which do not exclusively burden the rich. In the days of laissez faire people looked upon government as an institution whose operation required an expenditure of money which must be defrayed by taxes paid by the citizens. In the individual citizens’ budgets the state was an item of expenditure. Today the majority of the citizens look upon government as an agency dispensing benefits. The wage earners and the farmers expect to receive from the treasury more than they contribute to its revenues. The state is in their eyes a spender, not a taker. These popular tenets were rationalized and elevated to the rank of a quasi-economic doctrine by Lord Keynes and his disciples. Spending and unbalanced budgets are merely synonyms for capital consumption. 

—Ludwig von Mises, Human Action: A Treatise on Economics, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007), 3:849-850.

Failing to Understand the Problems of Capital, the Welfare School Pushes Santa Claus Fables

The Santa Claus fables of the welfare school are characterized by their complete failure to grasp the problems of capital. It is precisely this defect that makes it imperative to deny them the appellation welfare economics with which they describe their doctrines. He who does not take into consideration the scarcity of capital goods available is not an economist, but a fabulist. He does not deal with reality but with a fabulous world of plenty. All the effusions of the contemporary welfare school are, like those of the socialist authors, based on the implicit assumption that there is an abundant supply of capital goods. Then, of course, it seems easy to find a remedy for all ills, to give to everybody  “according to his needs” and to make everyone perfectly happy. 

—Ludwig von Mises, Human Action: A Treatise on Economics, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007), 3:848.

After the “Court Packing” Attempt of 1937, the Supreme Court Gave Up Its Mission of Protecting Property from Depredations

 When the Supreme Court, operating under the old principles, declared unconstitutional a number of New Deal laws, Roosevelt tried to alter its composition by adding new and more liberal justices. Although the infamous attempt to “pack the Court” in 1937 failed, the demoralized Court beat a retreat, and as old justices retired and appointees of Roosevelt replaced them, its philosophical complexion underwent substantial change:

The lacerating struggle over the validity of the New Deal Program engendered lasting hostility to the judicial protection of property rights. . . . Once the Supreme Court accepted the New Deal, the justices abruptly withdrew from the field of economic regulation. This reflected a monumental change in the Court’s attitude toward property rights and entrepreneurial liberty. From its inception, one scholar noted, “the Court deemed its mission to be the protection of property against depredations by the people and their legislatures. After 1937 it gave up this mission.” A sharply limited concept of property rights thus operated for the next generation. . . . Consequently, the Court gave great latitude to Congress and state legislatures to fashion economic policy, while expressing only perfunctory concern for the rights of individual property owners.

—Richard Pipes, Property and Freedom (New York: Alfred A. Knopf, 1999), Vintage e-book.

The Popular Doctrine of Modern Interventionism Exists in Defiance of Economic Science

 In defiance of economic science the very popular doctrine of modern interventionism asserts that there is a system of economic cooperation, feasible as a permanent form of economic organization, which is neither capitalism nor socialism. This third system is conceived as an order based on private ownership of the means of production in which, however, the government intervenes, by orders and prohibitions, in the exercise of ownership rights. It is claimed that this system of interventionism is as far from socialism as it is from capitalism; that it offers a third solution of the problem of social organization; that it stands midway between socialism and capitalism; and that while retaining the advantages of both it escapes the disadvantages inherent in each of them. Such are the pretensions of interventionism as advocated by the older German school of etatism, by the American Institutionalists, and by many groups in other countries. Interventionism is practiced—except for socialist countries like Russia and Nazi Germany—by every contemporary government. The outstanding examples of interventionist policies are the Sozialpolitik of imperial Germany and the New Deal policy of present-day America.

—Ludwig von Mises, Omnipotent Government: The Rise of the Total State and Total War, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2011), 69.

The Most Foolish Accusation Against the System of Free Trade and Private Property Is That It “Atomizes” the Body Social

Of all accusations against the system of Free Trade and Private Property, none is more foolish than the statement that it is anti-social and individualistic and that it atomizes the body social. Trade does not disintegrate, as romantic enthusiasts for the autarky of small portions of the earth’s surface assert; it unites. The division of labour is what first makes social ties: it is the social element pure and simple. Whoever advocates the economic self-sufficiency of nations and states, seeks to disintegrate the ecumenical society; whoever seeks to destroy the social division of labour within a nation by means of class war is anti-social. 

A decline of the ecumenical society, which has been slowly forming itself during the last two hundred years under the influence of the gradual germination of the liberal idea, would be a world catastrophe absolutely without parallel in history as we know it. No nation would be spared. Who then would rebuild the shattered world? 

—Ludwig von Mises, Socialism: An Economic and Sociological Analysis, trans. J. Kahane (Indianapolis: Liberty Fund, 1981), 276.

A Great Sociological Achievement of Classical Political Economy Was to Recognize the Social Function of Private Property

The division of individuals into owners and non-owners is an outcome of the division of labour.

The second great sociological achievement of Classical Political Economy and the  “individualistic” social theory of the eighteenth century was to recognize the social function of private property. From the older point of view property was always considered more or less a privilege of the Few, a raid upon the common stock, an institution regarded ethically as an evil, if sometimes as an inevitable one. Liberalism was the first to recognize that the social function of private ownership in the means of production is to put the goods into the hands of those who know best how to use them, into the hands, that is, of the most expert managers. Nothing therefore is more foreign to the essence of property than special privileges for special property and protection for special producers. Any kind of constraint such as exclusive rights and other privileges of producers, are apt to obstruct the working of the social function of property. Liberalism fights such institutions as vigorously as it opposes every attempt to limit the freedom of the worker. 

—Ludwig von Mises, Socialism: An Economic and Sociological Analysis, trans. J. Kahane (Indianapolis: Liberty Fund, 1981), 276-277.